Why Is Climate Finance So Hard to Define?

This is the first installment of our blog series, Climate Finance FAQs. The series explores the often nebulous world of climate finance, providing clarity on some of the key terms and current issues. Read more posts in this series.

Surprising as it may sound, there is no standard definition of climate finance. In fact, there are many differing views on what type of funding constitutes climate finance, how it should be delivered, and how much money developing nations will need to mitigate climate change and adapt to its impacts. This vortex of information can be confusing to navigate. Here, we'll do our best to break down all of the components that define “climate finance.”

Defining Climate Finance: Broadly to Narrowly

In its broadest interpretation, climate finance refers to the flow of funds toward activities that reduce greenhouse gas emissions or help society adapt to climate change’s impacts. It is the totality of flows directed to climate change projects—the same way that “infrastructure finance” refers to the financing of infrastructure, or “consumer finance” refers to providing credit for purchases of big-ticket household items.

The term is most frequently used in the context of international political negotiations on climate change. In this context, climate finance—or international climate finance—is used to describe financial flows from developed to developing countries for climate change mitigation/adaptation activities, like building solar power plants or walls to protect from sea level rise. This interpretation builds off the premise that developed countries have an obligation to help developing countries transform their economies to become less carbon-intensive and more resilient to climate change.
Some define climate finance even more narrowly, incorporating the notion of “incrementality” or “additionality.” For example, the Cancun Agreements—where developed nations pledged to financially assist developing nations with their climate mitigation and adaptation activities—explicitly recognize that tackling climate change requires “new and additional” funding. Under this definition, only those financial commitments that truly represent investments beyond a business-as-usual case would qualify to be categorized as climate finance. However, there is little agreement on what qualifies as “additional,” much less how to quantify it. (We’ll tackle this issue in a later installment of the Climate Finance FAQs series).

Public vs. Private Climate Finance

We can make further distinctions between public and private climate finance. Private climate finance typically refers to capital provided by the private sector; that is, the sector of the economy not controlled by the state. The private sector is made up of a wide range of actors, including individuals (consumers), small and medium enterprises, cooperatives, corporations, investors, financial institutions, and philanthropies. Public climate finance constitutes public dollars raised through taxes and other government revenue streams for climate change projects, whether international or domestic.

As you can see from this brief breakdown, there are many varying definitions and interpretations of climate finance. However, there is one thing that most experts can agree on when it comes to climate finance: there is a great need for more of it, especially in developing nations.

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